Archer Daniels Midland Company is considering buying a new farm that it plans to

Question

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10  years. The farm will require an initial investment of $11.90  million. This investment will consist of $2.60   million for land and $9.30  million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10  years at a price of $5.08  million, $2.32  million above book value. The farm is expected to produce revenue of $2.02  million each year, and annual cash flow from operations equals $1.84  million. The marginal tax rate is 35  percent, and the appropriate discount rate is 9   percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

NPV $ Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.90 million. This investment will consist of $2.60 million for land and $9.30 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.08 million, $2.32 million above book value. The farm is expected to produce revenue of $2.02 million each year, and annual cash flow from operations equals $1.84 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

Explanation / Answer

Since NPV is negative,project should be rejected .

Cash outflow In million $ Initial cash outflow 11.90 Cash inflow Cah flow from operations before tax 1.84 Cah flow from operations after tax 1.84(1-0.35)=1.20 PVAF(9%,10yrs) 6.4177 1.20*6.4177 Present value of cash inflows $7.70 Terminal value of cash inflows 2.32(1-0.35)=1.508 PVF=0.4224 1.508*0.4224 0.667392 Total cash inflows $8.37 NPV=pv of cash inflows-pv of cash outflows ($3.53)

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